Emerging-markets assets slump on credit turmoil

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NEW YORK (MarketWatch) -- Global emerging-market assets declined Friday, pressured by turmoil in the credit markets, which prompted investors to slash exposure to risky assets and central banks to pump billions of dollars into the banking systems.

"Turmoil continues in the global financial markets, and the impact is being clearly felt in emerging markets," said Lars Christensen, senior analyst at Denmark's Danske Bank, in a research note Friday. "Hardest hit are the usual suspects: Turkey, South Africa, Iceland, Hungary, Indonesia and the Philippines."

The emerging-markets situation, he said, "is very uncertain and the markets are very, very nervous," he said.

Central banks in Europe, Asia and the U.S. injected billions of dollars into banking systems Friday, moving to further boost liquidity in markets suffering ripple effects of the subprime-credit crisis and saying they stood willing to provide more cash. See full story.

"Severe market dislocation continues as the evolving catastrophe in the subprime-mortgage market has triggered a revaluation of risk pricing and resulted in a severe tightening in [the] availability of cash, forcing asset valuations in global [credit] markets -- including emerging markets -- to correct lower," said Nick Chamie, head of emerging-markets research at RBC Capital Markets, in a research note Friday.

In South Africa, the All Share index tumbled 4%. In India, the Sensex index closed down 1.5%. In China, the Shanghai Composite index edged down 0.1%.

Most other Asian equity markets closed with losses as well. Among the biggest decliners were South Korea's Kospi index, which fell 4.2%, and the Philippines' PSE index, which shed 3%. See Asia Markets.

"If credit concerns escalate further, we would expect especially those emerging markets with large external debts and deficits to come under additional pressure," Christensen said.

Examples are Turkey, South Africa, Hungary and Iceland, which are all struggling with substantial external imbalances. Central and Eastern European markets are vulnerable, since most of the countries in the region run large current-account deficits, he said.

"We would stress that we continue to see the global economy as fairly strong, and this should be supportive for emerging markets," Christensen said. "However, if the credit situation worsens further, obviously this might not be enough to protect emerging markets from further major setbacks."

The safest havens in the emerging-market universe are countries with strong external balances and the least funding needs, or primarily the Asian emerging markets and the countries in the Commonwealth of Independent States, which includes Russia.

Currencies, debt also hit

Many emerging-market currencies came under heavy selling pressure Thursday.

Against the U.S. dollar, the Turkish lira fell 1.2%, the Brazilian real lost 1.9%, the Icelandic krona slumped 3.2%, while the Hungarian forint was off 1%. The South African rand shed 0.6% against the dollar. The Mexican peso lost 0.3%.

Emerging-market debt spreads have widened by about 10 to 15 basis points, with CDS, or credit default swaps, basis continuing to widen, according to data from RBC Capital Markets. Yields in Turkey, Hungary, South Africa and Brazil have steepened significantly.

Credit spreads represent the difference between the yields of risk-free government bonds and that of riskier bonds. Yields rise when bond prices fall, and a wider spread means that yields on riskier debt rose sharply while those of safe government bonds fell.

"In times of severe market dislocation, where liquidity is diminished, attractive mispricings materialize offering investment opportunities in solid fundamental trades," Chamie said. "However, it is best to wait for some semblance of stability to return before contemplating such moves as the full extent of this risk repricing will take some time."

On the basis of four criteria -- sound economic policies, low leverage and financing needs, reliance on portfolio inflows and current account support, RBC Capital Markets ranked the vulnerability of the foreign-exchange and fixed-income markets of several key emerging countries.

In the low risk group are Brazil and Russia, while Mexico straddles low and medium risk because of its dependence on U.S. trade and financial flows, RBC said. Turkey, Colombia and Venezuela are in the medium risk category, whereas Iceland, South Africa and Argentina are high-risk plays if global risk aversion continues to rise.

In New York, the iShares MSCI Hong Kong Index Fund
EWH, -0.18%
which tracks the performance of the Hong Kong market, gained 1% at $17.33.

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